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China Isn't Quite Ready To Take On The World

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  • China Isn't Quite Ready To Take On The World

    By John Foley

    Daily Telegraph
    4:45PM BST 30 Mar 2009

    China is on the warpath - in rhetoric. Its usually anodyne politicians
    have lately delivered a slew of acid criticisms of the way the West
    runs its house.

    Premier Wen Jiabao questioned profligate US spending habits, and warned
    America not to scramble his $2 trillion nest-egg. Zhou Xiaochuan,
    governor of China's central bank, suggested the dollar should be
    replaced as the lingua franca of global finance. As President Hu
    Jintao jets into London's G20 meeting to duke it out with other heads
    of state, China may seem readier than ever to take on the world.

    There are good reasons for the newfound confidence. China was
    last into the financial crisis, and should be first out. Growth
    is still positive. Banks are well capitalised and light on toxic
    derivatives. Electricity production, manufacturers' sentiment and
    heavy industrial orders are already ticking up as Beijing firmly
    guides the economy. Consumption, while relatively small, has held
    up, and there are signs the "wealth effect" is returning, notably in
    enhanced stock market performance.

    Babaji: Making journalists' and politicians' lives that bit more
    predictableBut don't be deceived. While China has avoided some of
    problems that beset wealthier nations, it isn't ready to lead the way
    into a new world order. At home, battles remain, unemployment being
    the most worrisome.

    Officials have said 20m migrant workers are out of work as falling
    global trade asphyxiates China's exports.

    The true figure is probably higher. Urban unemployment is nudging 10pc,
    according to the Chinese Academy of Social Sciences. Some idle hands
    present a risk to civil stability - especially since inequality between
    city and rural communities has been replaced by inequality within them.

    The putative solution, a fiscal stimulus of Rmb4 trillion ($585bn),
    poses its own threats. Bad debts are likely to pile up on bank
    balance sheets, as the government mandates increased lending. Some
    Rmb2.7 trillion ($395bn) of new loans were doled out in January and
    February. Industries such as aluminium and microchips are already
    dealing with overcapacity.

    The stimulus may help the underemployed for a while, but when it ends,
    domestic consumption, the main pillar of a stable economy, won't take
    up all the slack right away.

    China's athletic growth rates were probably due for some moderation,
    global crisis or not. The country has undergone three previous
    bursts of energy since its 1978 experiment with capitalism began,
    each fuelled by a different steroid - first rural reform, then the
    introduction of market economics, and latterly accession to the World
    Trade Organisation. After each sprint, a slump followed. In 1989, GDP
    growth fell from 11pc to 4pc. Another deus ex machina is not in sight.

    Still, China has a case for rejecting some complaints from G20

    China is getting rich fast, but GDP per capita still lags Armenia
    and El Salvador. Yet the US and Europe demand it behave like a fully
    developed nation. Developing economies might need different rules
    when it comes to protecting nascent industries or the environment. Or
    foreign exchange rates - a big bone of contention.

    Acting tough on the global stage - especially when there is a good
    case - could be the most effective way to play to the crowds back
    home and smooth over the domestic tensions that could threaten China's
    considerable 30-year achievements.

    The urban and rural, state-owned and private, developed and developing,
    autonomous and federal sit uncomfortably together. Regional politics
    create another fault line, as local governments, tasked with deploying
    stimulus capital, fight to preserve jobs and factories in their own
    regions first. A divided China is still in no position to dictate
    terms to its global peers.

    One day, the China century may begin in earnest. The country could
    eventually unseat the US as the world's foremost consumer. But how
    will it get there? The financial crisis has probably put paid to most
    hopes that China would follow the path America laid down.

    Instead, it's likely to pick and choose - pairing market economics with
    national protectionism, for example, or Western corporate governance
    structures with state control. Even more than the US, China may want to
    supply most of its own needs, be they compact cars or luxury handbags.

    When that happens, other nations will have to adjust accordingly. Even
    if there is throw-down at the G20, that day hasn't yet arrived.